In the current economic climate, suppliers and retailers may be tempted to make more use of multibuys, in order to reduce stocks of slow-moving items, and at the same time create some category excitement in-store. However, a multibuy can soon morph into the unbelievably popular BOGOF, a minefield of potential profit losses for those suppliers and retailers who fail to run the numbers.
In fact, starting life as a multibuy, where a shopper was able to buy four packs of the same brand for the price of three, suppliers and retailers gradually ‘upped the ante’ in order to compete with other brands in the category by then offering three for the price of two, and eventually ended up with two for the price of one, in other words ‘Buy One Get One Free’, or BOGOF. Unfortunately, it would appear that somewhere about 3-for-2, people stopped counting the numbers…
In its day the BOGOF was undoubtedly effective for all parties, but big issues are now building up for the key parties involved, the shopper, the retailer, the supplier, and increasingly the Government.
For independent retailers, lacking the buying muscle of the supermarkets, yet needing to be competitive, the key issue is who funds the cost of the promotion. For the major multiples, the issue is to create excitement in the store, and clear excess stocks without devaluing the category.
For the suppliers, the issue is the danger of continuous BOGOFs devaluing the brand, by giving the consumer the impression that if say a jar of Nescafé is available as part of a continuous BOGOF promotion, the consumer is effectively paying half the normal retail price, eventually making the brand worth half its value, in the mind of the consumer, over time…
BOGOFs’ knock-on effect
In UK grocery retailing, the BOGOF has been so successful that consumer media and the politicians have become involved, as they believe that consumers buying one more than they need can lead to wastage, especially in the case of perishable food. This negative publicity has recently led to Tesco introducing Buy One Get One Free – Later, meaning the shopper picks up the free item when they have used the first one, thus avoiding possible waste. Given Tesco’s ability to manage and optimise its customer database, it is possible that this move could migrate to other categories, thereby increasing Tesco’s competitive edge, apart from raising their political status…
The other danger is that unless other retailers follow the Tesco approach, the Government could eventually legislate to force all retailers to replace BOGOFs with 50% price reductions, resulting in a major dilution of retailer profitability and elimination of the BOGOF rationale.
However, the real issues for suppliers and retailers have got to be who makes money from a BOGOF, and are they still a good form of promotion tool for either party?
This means being able to calculate the numbers for the shopper, the retailer and the supplier, in a 4-for-3, 3-for-2, and 2-for-1 promotion, in any category (See NamCalc for details). In most cases this will demonstrate that unless the retailer can be persuaded to share the financial burden, the 3-for-2 is questionable, whilst the BOGOF is financially non-viable…
In a classic jointly-funded BOGOF where the retailer forgoes the normal margin on the free item, both parties still lose money. However, when the retailer is strong enough to insist upon margin restoration, it can be seen that the supplier can lose £5.50 on a £10 BOGOF!
In effect, this loss is an additional investment in the retailer’s business, meaning that the supplier should also calculate the incremental sales, other than BOGOF, that are required to restore lost profit. In other words, a supplier making a net profit of 10% needs incremental sales of £100k for every £10k invested…
Incidentally, if you think that a retailer demanding the refund of retail margin from the supplier is tough, keep in mind that anecdotal evidence suggests that in UK grocery retail, some powerful retailers insist on not only a refund of margin to replace lost profit, but also demand the refund of the full selling price including VAT to recover the cost of the lost shopping basket opportunity!
